Article

Note: After Allegiance Telecom, Inc. (Seller) filed for protection under Chapter 11 (reorganization) of the US Bankruptcy Code, XO Communications, Inc. (Buyer) purchased substantially all of Seller's stock and assets under an Asset Purchase Agreement by whose terms Buyer was entitled to "the Assumed Contracts...including any related security deposits"

After the Bankruptcy Court approved the plan of reorganization, including the Asset Purchase Agreement, a dispute arose concerning its terms. Buyer contended that the above provision entitled it to certain letters of credit which Seller as Applicant had provided as security for the lease of office space in several cities including the collateral securing such LCs.

Unable to reach resolution, the parties sought judicial interpretation. The United States Bankruptcy Court for the Southern District of New York, Drain, J., issued a Memorandum Opinion stating that Buyer had no rights under the Asset Purchase Agreement to either the LCs or the collateral securing the LCs.

Pursuant to the terms of the Asset Purchase Agreement, Purchaser was entitled to the benefit of the leases. Although not addressed in the Asset Purchase Agreement, Purchaser contends that it is also entitled to "the benefit of the letters of credit and related cash and certificates of deposit posted to secure such letters of credit".

In rejecting this interpretation, the court stated that because Buyer "did not provide the underlying leases or copies of the letters of credit or security agreements between the letter of credit issuers and [Seller] or describe the status of the letters of credit, their proceeds or the cash security any reimbursement obligations", Buyer had not sustained its burden of proof. Relying on the court's opinion in New England Dairies, Inc. v Dairy Mart Convenience Stores, Inc. (In re Dairy Mart Convenience Stores, Inc.), 351 F.3d 86, 91 (2d Cir.2003), the court in this case noted that, "a beneficiary/landlord would not have a security interest in the letter of credit, let alone the cash securing [Seller's] reimbursement obligation to the letter of credit issuer."

[JEB/aee]

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